Pension decumulation Claire Trott Pensions Technical Manager Suffolk

Pension decumulation Claire Trott Pensions Technical Manager, Suffolk Life

Agenda • Background • Capped Drawdown • Flexible Drawdown • Investing for Drawdown HAPPY PENGUINS?

Why are we here? Drawdown changes 2011 -2012 Changes to age 75 rules Rise of flexible drawdown

What do we want to achieve? Reaffirm knowledge of implications of capped drawdown changes – Tax issues Be confident in complexities of flexible drawdown Review issues of investment for drawdown in these difficult times

Capped Drawdown

Scenario • Female, aged 62 • FV = £ 500, 000 • Wants max Pension Commencement Lump Sum

Questions 1. What is her Max GAD today 2. What would it be if the gilt yields remained the same but she chose to wait until Jan to crystallise? 3. List the circumstances that would cause the Max GAD to be recalculated/reduced 4. List some reason why Capped DD is still suitable even at reduced GAD rates

Model answers 1 • Max gad is £ 17, 250 • Fund value used = £ 375, 000 • Gad Rate, based on age, gender and FV = £ 46 per £ 1000

Model answers 2 • The interim gender neutral tables should be used • This means males table • • • Max gad is £ 18, 375 Fund value used = £ 375, 000 Gad Rate, based on age, gender and FV = £ 46 per £ 1000

Model Answers 3 • • Buy a lifetime annuity with part of the fund Buy a scheme pension with part of the fund Pension sharing order placed on the drawdown Crystallise further funds into the same drawdown arrangement

Model answers 3 - bonus points • Transfer from one RPS to another if you are crystallised before April 2011 • Will also mean a move to 100% GAD from 120% and move to triennial reviews • At their request, although this will only be at the anniversary of the pension year.

Model answer 4 • Retained control • Improved death benefit options • Investment control • Future retirement options • Not locked into current rates • Ability to take advantages of future improvements • Lumps sums • Flexibility for spouse

Flexible drawdown

Scenario - Martin • • • Male aged 70 Partially crystallised in Drawdown in February 2005 Review of limits in June 2011 • • Max GAD now £ 20, 000 He has: • • state pension benefits of £ 7, 000 • £ 500, 000 uncrystallised funds Final salary pension currently £ 15, 000 pa increasing annually by 5%, in payment since age 60

Questions • Give an overview of the basic conditions for Martin to enter flexible drawdown • List reasons for entering Flexible other than to strip the fund • Martin meets the conditions and enters flexible taking an income of £ 100, 000 from his fund, when he crystallises his remaining fund in October 2012, how much lifetime allowance is remaining following this crystallisation

Model answer

Model answer 1 1. No contributions (personal or third party) or accrual in a DB scheme have occurred in the tax year in which declaration is made 2. One payment of each income used for MIR has been received 3. The whole MIR (£ 20, 000) will be received in the tax year of the declaration

Model answer 2 • Protection of death benefits • Crystallise less to receive same income • Leaves more uncrystallised for death lump sum pre 75 • • Reduction in fees for triennial reviews Maximising income in tax rate band • Possible gifts from income - IHT

Model answer 3 First crystallisation since A-day, need to test pre A-day benefits 25 x £ 20, 000 = £ 500, 000 25 x £ 15, 000 = £ 375, 000 Lifetime allowance reduced by £ 875, 000 = 58. 33% BCE 1 = £ 375, 000 = 25. 00% BCE 6 = £ 125, 000 = 8. 33% Remaining LTA = 100 - (25+8. 33+58. 33) = 8. 34 Monitor increases in pre A-day benefits!

Investment in drawdown

Scenario • • • Male, Age 62, • He is a medium risk profile. Not looking to annuitise for at least 10 years Fund value = £ 500, 000 Going to take maximum PCLS Max Gad of £ 18, 750 but only looking to take income of £ 10, 000 pa.

Model answer Thanks to Brooks Macdonald Asset Management

GAD rates. . . built on Gilt Yields Source: Bloomberg, September 2012 24

Income segregation Source: Brooks Macdonald, 2012 25

Asset allocation Source: Brooks Macdonald Asset Management Fixed Interest Alliance Trust Monthly Income Bond Fund AXA Framlington US Short Duration HY Bond Fund UK Equity Lindsell Train UK Equity Fund Montanaro UK Smaller Companies Trust North America Threadneedle American Fund Europe Henderson European Special Sits Fund Japan, Far East & Emerging Markets Newton Asian Income Fund International & Thematic John Laing Infrastructure Fund M&G Global Dividend Fund Property Braemar Ground Rents Fund Structured Return IFSL Brooks Macdonald Defensive Growth Fund

Dividends matter – Global returns from January 1970 to December 2011 Source: MCSI, 2012 27

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